The pandemic and populist governments around the world in recent years have put pressure on globalization. International trade deals—such as USMCA, Brexit and the Trans-Pacific Partnership—will likely continue to evolve as governments enter into, withdraw from and renegotiate existing trade deals.
Trade conflicts such as the years-long tariff war between the United States and China have also threatened well-established business plans and supply chains.
As policy shifts under U.S. President Joe Biden, and as countries develop policies and strategies to challenge a rising China, international businesses need to reevaluate their trade strategies. Global disruptions such as the pandemic do not make it any easier. Here is a look at the terrain ahead for global trade.
Trade Deals and Trade Conflicts
Most trade deals aim to facilitate or promote cross-border trade. For instance, the recent Regional Comprehensive Economic Partnership agreement between China and 14 other Asia-Pacific countries aims to ease trade with the use of a single customs declaration throughout the region. And the EU-China trade agreement purports to encourage bilateral investments.
But the renegotiation of economic relationships through trade deals can occasionally have less desirable consequences. Thanks to Brexit, companies selling into the EU through Britain—or vice versa—now need to factor in additional time and budgets to meet customs clearance requirements and navigate port congestions, where previously there was a free and smooth movement of goods and people. This has had a significant impact on the auto industry. Auto companies that rely on just-in-time supply chains are reexamining their inventory holding periods to avoid a disruption in assembly processes on account of slower movement of components across the English Channel.
Trade conflicts, on the other hand, typically increase costs, disruptions and uncertainties. It is now a well-known fact that the U.S.-China tariffs increased costs for most U.S. manufacturers and their customers. These retaliatory measures between the two governments have continued in 2021. While we expect the tensions to moderate in the next few years, the rising global influence of China will ensure that protective and punitive measures are always on the table.
Outside of China, the United States retaliated with (and subsequently delayed) tariffs in response to France’s imposition of digital taxes on tech companies, making French luxury and beauty imports into the United States more expensive. Under the Trump administration, the potential arose for other retaliatory tariffs with countries that have imposed digital taxes, such as Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey and the United Kingdom, Bloomberg reported in November. Such tariffs are still a possibility, but we expect Biden would take a more coordinated and calibrated approach if he pursued them. There are also more tariffs planned for certain goods – aircraft parts, wines and other alcohol – from the European Union in the long-drawn dispute regarding domestic subsidies for Airbus and Boeing.
Adapting Supply Chains
Trade skirmishes with China (and pandemic-induced disruptions) have prompted companies to move parts of their supply chains to other countries. Biden’s approach toward China and his administration’s ability to re-establish rapport with global allies will be critical to the international trade framework. Biden and other lawmakers will need to make many macro policy decisions on globalization, domestic manufacturing, positioning of critical supply chains and economic incentives. At the same time, trade conflicts with allies related to matters such as steel and aluminum tariffs and digital taxes need to be resolved.
There is a high cost to international business if these trade dynamics are not proactively managed. Outside of any potential tariffs, companies may need to devote additional resources to handling regulatory issues, increased compliance and filing costs and potentially additional taxes.
For example, due to Brexit, North American manufacturers with U.K. regional holding companies may now have withholding tax obligations on payments between the EU and Britain. Other consequences may include lost opportunities on account of slower delivery of goods and material, lost opportunities due to lack of visibility into the impact of trade conflicts on operations, and increases in costs that companies may not be able to pass on to customers.
There is also the continued cost of doing business in countries or regions that were not part of a company’s original plan before having to adapt to disruption – local income and business taxes, health and environmental regulatory compliance, and employment obligations, to name a few. In addition, the longer uncertainty continues, companies may make costly decisions that have lasting consequences.
All of these disruptions, however also bring opportunities for companies to rethink their global operations. The industrial space is increasingly moving toward speed and customization, with flexibility at its core. As a supply chain risk mitigation strategy, industrial companies are thinking about regional supply chains closer to the customer. This can be an opportunity to customize operations to local preferences. “Glocalization,” the concept of adapting global operations to meet local considerations, is one helpful way to think about it; regional supply chains may reduce susceptibility to international conflicts or global pandemics. Recognizing each market’s unique characteristics and intentionally incorporating them into business strategies can make products and services more relevant, enhance a company’s presence in key markets and improve its connection to customers and communities.
Disruptions, for whatever reason, will be part of the future. The ability to look for opportunities and come out stronger on the other side of such disruptions will provide a competitive edge to the global manufacturer.
Shruti Gupta has more than 15 years of experience advising multinational clients on their transfer pricing planning, supply chain structuring, global compliance and controversy management strategies. She is a senior analyst in RSM’s Industry Eminence Program, which positions its analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves.